BiggerPockets

The Single Member Llc Gone For Good?

A Florida court just ruled that a creditor of the member of a single member LLC can liquidate the LLC to collect its judgment. A Colorado Bankruptcy Court ruled similarly about 4 years ago. So, are single member LLCs useless now?

Not really!

A single member LLC still has LIABILITY protection from outside creditors the same as a multi-member LLC or a corporation. As the member of the LLC you are protected from lawsuits of the company. However, it's the ASSET PROTECTION feature of LLCs that are what makes them particularly attractive, that is, a creditor of an LLC member cannot attach LLC assets but is limited to a charging order. However, not so, says at least two courts when it comes to a SINGLE member/owner LLC. Does this mean that all LLCs should be multi-member to avoid this debacle?

Maybe not.

The proper way to use a single member LLC is not to operate as a company anyway. For tax reasons, a single member LLC is the same as a sole proprietorship, which files on IRS form 1040, schedule C. You are subject to self employment tax for active earnings (flips, wholesales, etc) and you are more likely to be audited. I generally recommend an S corp for an active business such as this.

But for rentals, the LLC works fine, except for the single member LLC issue. So, instead of owning rentals in a single member LLC, own them either in a multiple member LLC (using your S corp as the other member at 1%) or layer the companies as follows:

SMLLC SMLLC
| |
MULTIPLE MEMBER LLC

This way you get the liability protection of the SMLLC and the asset protection of the multi-member LLC.

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